Second-quarter GDP figures released by Stats SA on Tuesday marginally beat expectations, with a 0.8% increase driven by mining and household spending.
South Africa’s growth story remains a bleak one given the economy’s potential, but the GDP increase registered in the second quarter was cautiously welcomed by analysts as the fastest growth rate in two years and the third consecutive increase.
However, geopolitics, US tariffs, domestic weaknesses associated with failing municipalities and struggling state-owned entities continue to weigh on growth, dampening business confidence and keeping South Africa’s fixed investment rate stubbornly low.
For Citibank’s Gina Schoeman, the slim increase in growth did not come as a surprise, though it was slightly more than the bank’s forecast of 0.6%.
Schoeman says the figures highlight the correctness of the Reserve Bank’s focus on inflation. This comes as the ANC mulls broadening the Bank’s mandate to shift its sharp focus on inflation to include unemployment.
A discussion on broadening the bank’s mandate is set to unfold at the ANC’s national general council, or midterm policy meeting, in December. It also comes as the National Treasury and the Bank disagree over lowering the inflation target of 3%.
Household expenditure increased 0.8%, contributing 0.6 percentage points to overall growth for the quarter, driven by spending on restaurants, hotels, clothing, footwear and transport.
“We see that GDP is driven by the consumer mostly and that’s largely because inflation was low, and then a helpful hand on top of very low inflation were the interest rate cuts that followed. But again, the fact that GDP was supported mostly by the consumer because inflation was so low is exactly why the Reserve Bank is so strict on inflation and is now preferring a lower inflation target of 3%,” Schoeman says.
Had gross fixed capital formation increased, the economy would have grown by 1%
“The lower inflation helps consumers spend more than just cutting rates and obviously, 60% plus of our population can’t even benefit from rate cuts because they don’t have that type of debt, but they benefit hugely from low inflation.”
Another positive was the contribution of the mining sector, which highlights an issue that has to be addressed urgently by the government.
On the upside, one of the biggest gains came from mining, mainly platinum group metals (PGMs) and chromium ore.
“Commodity prices are very strong at the moment, and [the figures] show how just the price effect can help South Africa so much, because the flip side of this is that our export volumes can’t pick up until those reforms come through from Transnet,” Schoeman says.
While there has been some positive news from Transnet, the progress has not been fast enough to allow export volumes to pick up meaningfully.
Another positive is that PGMs and chromium are exempt from US President Donald Trump’s tariffs, which Stats SA says should begin showing up in the data in forthcoming quarters.
“So again showing that yes, the tariffs we’re sitting with will bring a deduction of 0.2 percentage points, and they will hurt agriculture, they will hurt automotives ... But the impact would have been so much worse if the US had put tariffs on PGMs and chromium. Why won’t it? Well, almost 100% of the chromium ore the US uses comes from South Africa, and then about 50% of the PGMs it uses comes from South Africa. So these things are likely to remain exempt,” she says.
The lingering worry for economists, from Citibank to the Bureau for Economic Research to policy think-tank the Centre for Risk Analysis (CRA), is the low fixed investment rate.
Gross fixed capital formation (GFCF) contracted by -0.2%. Had GFCF increased, the economy would have grown by 1%, says CRA executive director Chris Hattingh.
“GFCF is an indication of investments in real, hard fixed assets and infrastructure. When GFCF increases, it is an indication of meaningful domestic and international confidence in a given country’s policy environment [and] in the business environment, and that the increased investments will be safe and secure.
“An increasing GFCF rate signals increased real confidence in a given country’s growth case. As an emerging market, South Africa should attain between 20% and 25% GFCF growth; the country’s rate is usually in the 13%-15% range,” Hattingh says.
With volatility in global trade and investment markets, investors are looking for the best pro-business, pro-growth markets to lean into. However, South Africa’s consistent underperformance in gross fixed capital formations shows the country is not providing a compelling case for domestic and international investors. Herein lies the tragedy behind South Africa’s GDP figures for almost two decades.
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